Where are we headed is the question?
Will oil be the issue of 2015 or Eurozone deflation?
There’s been some volatility in recent months for financial markets were the VIX index, referred to as the fear index for markets, showed larger peaks appearing as investor concerns rose over issues like the ending of QE in the US, weak Eurozone demand or Russian actions over the Ukraine and more over.
Then, lately a turn-about with mix of data (usually from US sources) of more benign economic news of employment rates rising, with positive quarterly growth, the end of QE tapering has passed and nerves have steadied and now the VIX index chart has receded to its troughs once more.
Furthermore China is still, albeit slower, recording economic growth of 6-7% with a cooling housing market. Commodities like iron ore or oil (and gold too) spot prices have fallen to levels which should provide a spur to company investment plans and consumer appetite for increased discretionary spending in the US, the UK and hopefully Europe too.
Falling oil prices, with Brent now below $80 per barrel, are becoming a bigger geo-political story that will affect countries and economies from Russia-Iran-Venezuela even low cost producers like Saudi Arabia and the US in 2015. Oil at below $80 and falling will affect LNG projects in countries like Australia also tar sands and higher cost shale oil producers will be affected. May this be a reason for the Halliburton-Baker Hughes merger talks?
The Bank of England has announced wages have grown more than inflation for the 1st time for 5 years and the UK economy is expected to grow in 3% for 2014 and 2.9% next year, according to the UK’s Office of National Statistics.
The Eurozone has recorded anaemic 0.2% growth between Q2-3 (FT, 2014). The ECB remains reluctant (with German influence) to embrace their own QE to stimulate Eurozone demand, such as infrastructure spending in Germany itself which recently recorded weak economic activity of 0.1% in Q3, further risking deflation and low economic growth becoming manifest with the European economies. This leaves international investors, especially US, concerned with investment prospects for 2015 (and beyond).
EU labour and the regulatory government reforms, which keep getting fudged by countries like France or Italy, and reluctance to use this period of low interests rates to make necessary long term reform and investment to achieve needed growth in the future to cope with increased demands from an aging populations. This is a major challenge being face long term by western economies.
Worryingly, Russia seems to veering to further difficulties with coping with the Crimea and tacit support for the Ukrainian separatists with the oil price sliding and sanctions biting oil and gas projects are being delayed or cancelled. Putin, even with his currency reserves and Oligarch supporters, will have to weather falling oil revenues and rising costs.
The Middle East continues to threaten and burn too. IS and the Kurdish battles from Northern Syria in to Iraq continue to escalate yet seem to be contained (for now). An Iranian nuclear/sanctions deal of some kind remains possible in the months ahead. However, Libya is chaotic and the Palestine remains mired in unrest over Israeli containment.
Amazing how the oil price is falling then-is it too much supply or too little demand from the world economy? Opinion is divided yet indices, notably the S&P500 is hitting highs and the NASDAQ returned to a 14.5 year high. Most sectors are now up yet oil stocks are down- though now being bought from lows.
Commentary from Bloomberg and CNBC recently suggests a rally from mid-November, after the mid-term elections, in to April/May 2015 perhaps up to highs of 2300 on the S&P500 (12.5% up from 2038) may be possible before another leg down of 5-7%. Rising interest rates from later in 2015 perhaps a cause to rein them back especially if employment rates keeps improving.
So let’s enjoy the Santa rally and be mindful and vigilant of the ever changing direction of financial markets and world events. With a turbulent 2014 a benign end of year rally, deserved or not, always helps to achieve the end of year targets or investors’ hopes.
LDC
Reference-
Jones, C, Thomson, A and Wagstyl, S; (2014); “Eurozone’s return to growth fails to soothe concerns”, THE FINANCIAL TIMES LTD 2014, London, UK. Website accessed Fri. 14th November 2014: http://www.ft.com/cms/s/0/7257bc3e-6bcb-11e4-b1e6-00144feabdc0.html?ftcamp=published_links%2Frss%2Fglobal-economy%2Ffeed%2F%2Fproduct&siteedition=uk#axzz3J4omRtmU